How Target-Date Funds Can Shortchange Men

Men have a substantially higher failure rate than women in achieving pre-retirement income levels when relying on the asset mix changes in target-date funds, which suggests more customized and aggressive investing for men may be in order, according to a recent study.

The study suggests that predetermined “glidepaths” built into target date funds — the way the asset mix changes automatically over time, typically to a more conservative position as the retirement date approaches — are not a “one size fits all” approach.

These formulas “are useful tools for asset allocation and for limiting behavioral biases, but do not account for all the characteristics of an investor, leading to highly varied failure rates between men and women,” according to the study from authors Robert Atra, associate finance professor at Hillsdale College, and Yuntaek Pae, director of the Margolis Market Information Laboratory at the University of Illinois, Urbana-Champaign’s Gies College of Business.

The results imply that average allocation changes embedded into target-date funds “may be more appropriate for women than men,” the study found. “Indeed, men may have to increase equity allocations to allow for more reasonable failure rates, compared to women.”

The idea of adjusting target-date fund allocation rules by individual characteristics is ripe for product development, according to the researchers.

The analysis for “Should Glidepaths Be Gender-Specific?” indicated that income levels, earnings patterns and life expectancy have the largest contributions to differences in failure to reach pre-retirement income. 

“The results also suggest that aggressive allocations on the part of men may be a rational attempt to achieve retirement failure rates comparable to women,” and not necessarily a natural behavioral difference, they wrote, noting that numerous studies identify men as more aggressive investors than women.

The researchers ran simulations using historical earnings and investment data, lifespans and other statistics. Target-date fund allocations tended to be a bit more conservative, making it harder for people to succeed if they had high earnings or a high earnings peak, Atra explained to ThinkAdvisor. Men essentially needed to hit higher earnings replacement targets than women, he said.

“Target-date fund and rule of thumb allocations are useful but blunt instruments for retirement asset allocation,” the study concluded. “By using only years to retirement or age as the input to the allocation mechanism, potentially important characteristics are not entering into the decision-making process.”

For investors aiming to live well in retirement and replace their pre-retirement earnings, “the males had a tougher job in terms of the earnings because those were higher,” Atra said. It may not be that men are more risk-taking investors by nature, but that they’re behaving rationally in making riskier investments in hopes of replacing earnings, he said.

A financial advisor with a high-earning female client would have a “double problem,” though, Atra said. They’d need to help the client replace high earnings and plan for her potentially longer life. The authors conceded that their broad characterizations of men and women don’t hold for everyone.

Women historically have tended to be a bit too conservative and light in equity in investing, but target-date funds have helped to boost their equity allocations, the professor said.

The paper’s findings could be incorporated into structured products that help investors replace their peak earnings, possibly taking investors’ health, for example, into account, according to Atra. Very healthy people probably need to invest more aggressively, he said.

“You can kind of trick a target-date fund,” he said, noting that someone who wants to be more aggressive can choose a later target date.

Advisors and investors can incorporate gender, earnings and health into portfolio asset allocation decisions and not target retirement dates alone, he suggested. Aggressive investing is going to be critical for many people, Atra said, as being too safe in investments can damage a high earner’s likelihood for success in replacing earnings.

“Not only save early and save often but probably also save aggressively as well,” he said.

Image: Adobe Stock